Short-Seller’s Report Casts Dark Shadow on DatChat

There’s been a lot of talk about blockchain, cybersecurity and social media company DatChat (NASDAQ:DATS) lately. Unfortunately for holders of DATS stock, not all of the chatter has been positive.

For instance, InvestorPlace contributor Mark R. Hake described DatChat as a “private messaging application company with little going for it,” aside from the $11.04 million it raised at its Aug. 13 initial public offering (IPO). That’s not what I would call a ringing endorsement.

On the other end of the spectrum is former hedge fund manager Will Meade, who recently tweeted, “100% $DATS will squeeze to $20.” Granted, it’s entirely possible that the Reddit short-squeeze crowd will make this happen.

Before you jump into the trade in anticipation of a massive short squeeze, however, be sure to conduct your due diligence on DatChat. This would include learning about a scathing report against DatChat, which has enough sordid details for a soap opera.

A Closer Look at DATS Stock

DatChat’s prospectus from August lists the company’s IPO price as $4.15. That same prospectus also mentions DatChat’s unaudited net earnings loss of $996,771 as of March 31, 2021.

However, the company’s fundamentals didn’t seem to matter in the short term as DATS stock rose to $8 in August. Then, the price action got even crazier. Maybe it was a Reddit pump, or maybe it wasn’t, but somehow the DatChat share price soared to $18.50 on Sept. 29. After a crash to $7 and change, there was another pump to $15 in October.

It’s hard to form any conclusions about where DATS stock is headed. It’s been a veritable roller-coaster ride lately, so please don’t take a large position size in this unpredictable stock.

Prioritizing Privacy

According to the company’s prospectus, DatChat’s flagship applications are the DatChat Privacy Platform and Private Encrypted Social Network. The selling point of these applications is that they allow the users to communicate with privacy and give them more control over their messages and social posts—even after they’ve already been sent or shared.

DatChat is also developing a blockchain-based, decentralized communications platform.

At the time the prospectus was published, DatChat apparently had around 22,572 monthly active users (MAUs)—not too bad for a social-media start-up.

InvestorPlace contributor  William White described some key features of DatChat’s Privacy Platform. Notably, it encrypts users’ messages and allows the users to delete messages after they’ve sent them (even if those messages are already on another person’s device). Furthermore, it’s virtually impossible for another user to take a screenshot of a message sent through the Privacy Platform.

Going Short and Getting Sordid

All of this might sound appealing, so far. After all, who could possibly object to a company that prioritizes the privacy of its users?

Actually, Culper Research is making no bones about its short position in DATS stock. Moreover, in a searing report, Culper’s condemnation of DatChat is relentless. Before we delve into the details, please understand that these are only allegations, and I haven’t verified their accuracy.

For one thing, Culper Research observes that “Despite launching the app in 2015, DatChat has a paltry monthly active user base of just over 22,000.” Personally, I don’t think that this is such a low number, but I’ll let you make your own judgment about that.

Here’s where it gets much worse, though. According to Culper Research, many of those users aren’t authentic:

“[O]ur experience with the app leads us to believe that many so-called ‘active users’ are in fact bots, scammers, and those using DatChat to solicit prostitution,” the report asserts.

The problem here is that prospective investors can’t affirm or deny Culper Research’s experience with DatChat.

There’s also an allegation that since Aug. 26, DatChat has released five press releases (as of the time of the report), yet none of them disclosed an updated MAU figure. If that’s true, then it is definitely an issue of concern. Without transparency, it’s awfully difficult for investors to take a position in DatChat with confidence.

The Bottom Line

As always, due diligence will make you a more informed and, hopefully, profitable investor. It’s worthwhile, before considering a position in DATS stock, to consider Culper Research’s allegations.

In the final analysis, though, you’ll need to weigh the merits of Culper’s arguments. DatChat could end up proving its critics wrong—and enriching it shareholders in the process.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.